Boomersbusting bonds

Exit stocks in 401(k)s

By GREGORY BRESIGER

Last Updated: 1:07 AM, March 11, 2012

Posted: 1:45 AM, March 11, 2012

Article from New York Post

Blame it on the boomers.

That’s how some market analysts are categorizing the meager interest returns Americans are getting on their savings accounts.

Baby boomers have been moving their retirement funds into the bond market in droves, keeping yields at historic lows.

Over the past three years, for each dollar that went into a stock fund, almost $5 went into a bond fund, according to Lipper, a fund-rating service, in a recent report.

“Perhaps it is just a matter of demographics at work, but we have seen a strong trend in mutual fund flows that suggests investors have begun earnestly diversifying their portfolios toward fixed-income products, in many cases away from equity funds,” says Tom Roseen, a senior analyst with Lipper.

Roseen added that it’s “definitely a significant change in the investment trend from 10 years ago.” And “the trend of people buying more bonds has been going on this year.”

What does this mean for stocks? Well, unlike the Internet bubble, where investors chased the phantom profits of overnight sensations, today’s equity valuations come at the same time a new study warns that nations with older populations are likely to see lower stock returns over the next decade.

“Stocks perform best when the roster of people age 35-59 is particularly large, and when the roster of people age 45-64 is fast-growing,” wrote Robert Arnott and Denis Chaves, who run Research Affiliates, MOVING ASSETS Boomers are rushing into bonds.                         an investment bank in Newport Beach, Calif.

“Bonds follow a similar pattern, with an age shift: They’re best when the roster of people age 50-69 is growing quickly,” Arnott and Chaves wrote in the January/February issue of the Financial Analyst Journal, a publication of CFA Institute, an organization of investment professionals.

Why do the investing habits of those in or near retirement tend to drive down stock prices?

“As they slide into retirement,” Arnott and Chaves write, “they begin to sell assets in order to buy goods and services that they no longer produce — either directly, through their own investments, or indirectly, through their pension benefits. They tend to liquidate their riskiest assets (stocks) before their less-risky assets (bonds),” according to the study.

That seems to be happening in the US right now.

Still, advisers, who agree that the boomers are a part of the change, say the downward pressure on stock prices could be self-perpetuating. “Poor markets over the last decade, including the memory of the meltdown of 2008 or the flash crash, could hurt the stock market,” says Kevin McDevitt, an analyst with Morningstar. Indeed, the generation comprising the children of the boomers could perpetuate the trend.

“People are still skittish about 2008. And they also made very good money in bonds last year, while stocks didn’t return anything,” says Charles Hughes, an adviser in Bay Shore on Long Island. He notes that Barclays Bond Index returned some 7.8 percent last year while the stock market was unchanged. That, together with memories of 2008, are why stock funds aren’t popular, he says.

“Investors are worried about getting burned again as they did in 2008,” Lipper’s Roseen agrees. “And there are plenty of boomers who are worried about losing too much money just before they need it for retirement,” Roseen says.

Article from New York Post

Investing in Bonds: Three Steps to Smarter Bond Investing

by Alexander Green, Investment U Chief Investment Strategist

Monday, March 5, 2012: Issue #1722

Article from Investment U

At our Oxford Club Chairman’s Circle conference at The Ritz-Carlton in Naples last week, I noted a decided optimism about the outlook for the bond market. This enthusiasm is almost certainly misplaced.

We’re at the tail end of the biggest 30-year rally in bonds the nation has ever seen. Recall that three decades ago, Fed Chairman Paul Volcker pushed the prime rate all the way up to 21.5% to squelch inflation. Long-term Treasury yields reached 16%. But from that pinnacle, long-term yields have plummeted to around 3% today. Bond prices have soared accordingly.

It isn’t just unlikely that today’s bond buyers will see annual double-digit returns going forward, it’s mathematically impossible. And yet I sense that many fixed-income investors don’t understand this.

It’s not unusual to meet an investor who has plunked money in a bond fund because “its long-term track record is excellent.” They don’t seem to realize that it’s also irrelevant. Never has the old saw, “Past returns are no guarantee of future results,” been more apropos.

This doesn’t mean you should avoid bonds altogether, of course. But if you’re going to buy bonds, now more than ever you need to be smart about it. Here’s what you should do:

1. Ladder your maturities. You should buy two-year, five-year and 10-year bonds. If rates go up – as they will eventually – your bond prices will fall, temporarily. But you will get your principal back at maturity and be able to reinvest your principal at higher rates. And paltry as bond yields are today, they still beat the heck out of the 0.05% that the average money market fund is paying.
2. Keep a close eye on expenses. In the world of fixed-income investing, keeping a Scrooge-like eye on expenses is essential. Why? Because it’s difficult to work magic in the button-down world of fixed-income investing. Managers rarely earn their fees. And 12b-1 fees can eat away at your returns like termites in an antebellum house. My advice is to stick with individual bonds, Vanguard funds (whose expenses are one-sixth of the industry average) and low-cost ETFs.
3. Avoid leveraged bond funds. Ever wonder how bond yields can be so low and yet the yield on your closed- or open-end bond fund is higher, even after expenses? Open your eyes. Unless you’re holding junk bonds, your fund manager is using leverage, the fixed-income equivalent of buying stocks on margin. By borrowing cheap, he or she is leveraging the portfolio to add yield. This works just fine while bond prices are flat or rising. But when bond prices fall – as they will when interest rates rise – these shareholders will take a shellacking. Consider yourself forewarned.

Some fixed-income investors tell me they feel safe for now since Bernanke has pledged to keep interest rates low through 2014. Think again. The Fed has only announced its intention to keep rates low. (Future economic conditions could quickly change that.) The Fed is also keeping long-term bond yields artificially low by buying these instruments to goose the economy.

Inflation could tick up. The Fed could raise rates and/or quit buying long-term Treasuries. In the end, the Federal Reserve sets short-term interest rates, but not bond yields and prices.

Know this. Understand it. And act accordingly. Bond investors today should be in a defensive posture, capturing higher yields than what’s available in cash instruments, but prepared for that point in the future when bond yields will rise and prices will fall.

Good Investing,

Alexander Green

Article from Investment U

Where to Find the Bargains

UPSIDE Updated March 2, 2012, 6:37 p.m. ET

Article from The Wall Street Journal

Stocks and higher-yielding "junk" bonds have surged so much in recent months that bargains are getting difficult to find.

At the same time, safer investments such as Treasury bonds and high-grade corporate issues have meager yields.

Faced with this dilemma, investors should plan for lower returns ahead. But they also can look to certain pockets of value within the stock market, as well as some junk-bond funds with a history of beating their peers without taking on too much risk.

Investors have turned sweeter on risky assets in part because of a smattering of good economic news. The U.S. economy grew by 3% in the fourth quarter, faster than originally reported, the government said Wednesday. Jobless claims are near a four-year low. The inventory of homes listed for sale has shrunk.

But investors also have been nudged toward risk by the Federal Reserve, which has been buying Treasury bonds to drive down interest rates. On Jan. 25, the Fed gave an unusually long look ahead, saying the Fed funds rate is likely to remain "exceptionally low" at least through 2014.

That means bond yields, which move in the opposite direction of price, aren't likely to soar soon. The 10-year Treasury recently yielded 2%, versus an average of 6.2% since 1953. Yields on high-grade corporate bonds are likewise near record lows. Procter & Gamble last month issued 10-year bonds with a 2.3% coupon. H.J. Heinz this past week sold five-year bonds that pay just 1.5%. Most money-market mutual funds pay less than 0.25%.

Meanwhile, the inflation rate was 2.9% over the year through January. The upshot: investors are looking at paltry, or even negative, returns in safe investments like these, after adjusting for inflation.

The problem is that risky assets have run up sharply. The Standard & Poor's 500-stock index has returned 9.7% this year through Thursday—close to what it has historically returned, on average, in an entire year. The index has roughly doubled from its financial-crisis low three years ago.

One way to tell whether stocks are cheap or expensive is to compare prices with company earnings. The S&P 500 closed Thursday at 15.8 times reported earnings for the past four quarters. Its historical average is 15.5 times earnings, according to data provided by Yale University economist Robert Shiller.

Stocks are worth a premium during periods when earnings are poised to grow quickly, all else held equal. But Wall Street's earnings forecasts have been steadily falling over the past six months, according to Howard Silverblatt, senior index analyst at S&P.

This quarter's earnings are now expected to be just 6% larger than those from the same quarter a year ago, when the growth rate was 16%. (Please see "Playing the Profit Wave," Page B9.)

So while stocks don't seem wildly overpriced, they do seemed priced for mediocre returns.

But there are good deals to be found within some sectors. Among the 10 economic sectors represented in the S&P 500, financials are the least expensive, discounted about 15% to the broad index, based on trailing earnings. And earnings for the group are projected to grow just as fast as those for the index this quarter.

On the other hand, technology is priced on par with the broader market, but its earnings are expected to grow faster—this quarter, by 10%.

Investors can get broad exposure to these sectors with modest expenses via exchange-traded funds like iShares Dow Jones U.S. Financial Sector Index and Technology Select Sector SPDR. But each sector has some parts that are more attractive than others, says Mitch Rubin, a managing partner at RiverPark Advisors, an asset manager overseeing $350 million.

Among financials, Mr. Rubin dislikes companies that are in the primary business of lending money, because yields are so low. That rules out most banks. But he likes Blackstone Group , because as a global investment company it has exposure to rising wealth. The company is structured as a limited partnership and must pay out the bulk of its profit in dividends. It currently yields more than 5%.

In technology, Mr. Rubin shuns old-line computer makers that are struggling to hold on to market share. He favors eBay and Google because both have more cash than debt, are priced in line with the market and are growing their profits by double-digit percentages.

High-yield bond prices have soared, too, as yields have plunged. The Bank of America Merrill Lynch U.S. High Yield Master II index recently yielded just over 7%, down from about 20% during the financial crisis.

Investors should expect total returns of closer to 4% a year on these bonds, according to a recent analysis by MFS Investment Management in Boston. That's because junk bonds tend to lose around two percentage points of their return to defaults on average. Also, the average junk bond is now selling at a premium to what investors will receive at maturity. That, along with trading costs, could shave another percentage point or so from returns.

It is possible to shop for bargains within the junk-bond universe, but that is best left to experienced mutual-fund managers, says Eric Jacobson, head of fixed-income research at Morningstar .

Some funds have a better record than others of delivering solid returns without excessive risk. Mr. Jacobson likes Vanguard High-Yield Corporate and Fidelity High Income , both of which have relatively low fees.

The Vanguard fund costs 0.25% a year and has a yield of 5.5%. It returned 6.2% a year over the past 15 years, versus an average for high-yield funds of 5.3%, according to Morningstar data. The Fidelity fund costs 0.75% a year, yields 5.8% and has also returned 6.2% a year over 15 years.

A final thought for savers looking for a place to park cash: Now might be a relatively good time to spend some of it. Any purchase carries an opportunity cost in the form of the return that could have been earned if the money were invested. That means spending looks more attractive now than it did three years ago.

That isn't a reason to squander, of course. But the new roof and the family trip to the Rockies that got put off during the market crash are starting to look like better deals relative to what is on offer in the stock and bond markets.

—Jack Hough is a columnist at SmartMoney.com. Email: jack.hough@dowjones.com

A version of this article appeared Mar. 3, 2012, on page B7 in some U.S. editions of The Wall Street Journal, with the headline: Where to Find the Bargains.

Article from The Wall Street Journal